So I know enough to know that I should not try to time the market and just buy and hold despite what is going on in the market. That being said is there any benefit for stocking aside a larger (still less than 5% of the overall portfolio, but more than I do now since I am 100% equity stocks) to dump into the market if another bear comes around? My net income is so low after accounting for my savings/investments, that to have a considerable amount I need to start saving for it now. I'm a big Random Walk fan, so I know market timing is risky and does not have much success, but I can keep cash in my 457 in a 1.90% interest account. So it should keep up with inflation in the short term. Just wanted to know what mustachians think, all I hear about in market news is how the Bull is tired and the Bear is coming soon.

So I know enough to know that I should not try to time the market and just buy and hold despite what is going on in the market. That being said is there any benefit for stocking aside a larger (still less than 5% of the overall portfolio, but more than I do now since I am 100% equity stocks) to dump into the market if another bear comes around? My net income is so low after accounting for my savings/investments, that to have a considerable amount I need to start saving for it now. I'm a big Random Walk fan, so I know market timing is risky and does not have much success, but I can keep cash in my 457 in a 1.90% interest account. So it should keep up with inflation in the short term. Just wanted to know what mustachians think, all I hear about in market news is how the Bull is tired and the Bear is coming soon.

Millionaire Teacher makes an interesting point that his bond allocation may assist in boosting overall returns because he can sell some to buy equities when rebalancing during a bear market. The best sale in the world is useless if you have no cash to buy. I'd say 5% cash (or some other asset class uncorrelated to equities) is a good idea (100% equities is quite the balls-of-steel asset allocation!)

I guess I should qualify that, I am a government worker so I am covered by an automatic 11% pension with full match after 10 years. So my 457 is the only investment vehicle I have control over. In addition, I'm only 26, and with the pension I feel that definitely increases my safety margin (the state pension plan I have is constitutionally protected, so unless AZ secedes its not going anywhere). And that was what I was getting at, to be able to take advantage of a discounted stock market I would need to start saving a cash % beforehand, or I would not have extra money necessary. Thanks though, I can hit and maintain 5% easily enough.

I think it's okay to save the 5% cash and look for a lower buy in point especially with the interest you are getting. I think it's okay to be a little like Warren Buffett with a small portion of your money especially when the market is on the high side. You may risk losing some growth if the market keeps going up and up, but it's not as likely to soar in the near term and more likely to take a dip. At your age, it's okay to take that risk with a small percentage if your gut feeling is that you should. I had a real estate closing recently and have not pumped the excess equity into the market either, however I do continue to max out tax advantaged retirement stock accounts even though the market is high.

Like I said in the intro post, I understand it is foolish to try to time the market and sell out at the top. Buying at the bottom though, provided it is with cash and not equities sold, in my opinion, is something we should all try to do. Even MMM wrote an article about this, I believe it was How to Tell the Stock Market is on Sale. Given that the efficient market theory states that everything must return to the mean, I don't think it is ridiculous to postulate that we are due for a bear market, or even a crash at sorts. The Russell 2000 just set an all time record, and with the S&P 500 at 2,104.99, I think we can at least guess that something is coming.

Normally I stick to my AA pretty closely, but I am ok letting 5% of my portfolio go to something else for a time. Right now it still wouldn't be cash because there are still other options. 1. International stocks aren't cheap, but they are cheap compared to domestic stocks right now. 2. Peer to peer lending.

There is no need to go to risk free unless you need the money in the next 6 months.

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Just wanted to know what mustachians think, all I hear about in market news is how the Bull is tired and the Bear is coming soon.

They have been saying this forever. There are people in market news who say the market is going to crash every week so that when it eventually does they can be the 'guy who called it.' Ignore anyone who thinks they can predict market returns, especially in the short term.

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Given that the efficient market theory states that everything must return to the mean, I don't think it is ridiculous to postulate that we are due for a bear market, or even a crash at sorts. The Russell 2000 just set an all time record, and with the S&P 500 at 2,104.99, I think we can at least guess that something is coming.

I don't think the EMT actually says that. It actually sounds like the complete and utter opposite of what the EMT says. The efficient market theory focuses on all information being available at all times so that its basically impossible to predict the market. In the strongest form of EMT even the insiders are considered clueless. If you believe in EMT then PE ratios and CAPE ratios are useless. I figure EMT is mostly right, but there are some inefficiencies.

Now also keep in mind there is a very strong possibility that the 'means' have adjusted permanently upward. Since the late 80s more people have 401ks, more people have mutual funds, brokerage fees have come down drastically, investor education has increased, stock market information is more widely available.... more people are investing in stocks. If there is more money in the market, and there is more overall demand across the world for stocks then there was at any time before then it is a very real possibility that the mean PE ratios of today and into the future may be 18-20 range instead of 14-15. If you are planning on a reversion to the mean PE ratio of 15 you might be waiting forever or until a very deep 2008 style recession. And PE ratios have stayed above 15 for most of the past three decades.

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It was Buffet so said something along the lines of “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.

He also said the average investor was better off just parking their money in an index fund and not worrying about it.

So in conclusion: Don't try to time the market. Trying to make short term guesses is a fools errand. But if you think things are a little expensive I don't see any problem shifting 5% of your portfolio to something cheaper as long as it is a longgggg term play.

So I know enough to know that I should not try to time the market and just buy and hold despite what is going on in the market. That being said is there any benefit for stocking aside a larger (still less than 5% of the overall portfolio, but more than I do now since I am 100% equity stocks) to dump into the market if another bear comes around? My net income is so low after accounting for my savings/investments, that to have a considerable amount I need to start saving for it now. I'm a big Random Walk fan, so I know market timing is risky and does not have much success, but I can keep cash in my 457 in a 1.90% interest account. So it should keep up with inflation in the short term. Just wanted to know what mustachians think, all I hear about in market news is how the Bull is tired and the Bear is coming soon.

Yes, if your income is not high enough to invest quickly after a crash, you should keep at least 5% cash on hand so you can buy low if there is a crash. I don't think this is market timing - you're just getting away from 100% equities which is smart. It should be a long term move and not something you do just because we've been on a bull run, though.

It is certainly not indication, and nobody can time the market, but not only has the S&P 500 dropped almost 30 points so far today, but the Russell 2000 is down 24 points as well. Is this a blip due to the threat of Grexit, or mixed earning reports for Q1, or is it a true market correction bringing on the year, or years of the bear? I certainly don't know, but I will be looking for some choice buying opportunities hopefully in the future.

It is certainly not indication, and nobody can time the market, but not only has the S&P 500 dropped almost 30 points so far today, but the Russell 2000 is down 24 points as well. Is this a blip due to the threat of Grexit, or mixed earning reports for Q1, or is it a true market correction bringing on the year, or years of the bear? I certainly don't know, but I will be looking for some choice buying opportunities hopefully in the future.

The fallacy with this line of thinking is that "well the market is at an alltime high, it's going to crash" because the market is often at an alltime high. There are many, many years where this strategy results in "don't invest."

You would effectively not have invested in the S&P 500 any of the following times:

1989 - 2000

2013 - present*

The Dow would have been a "bad" time from:

1924 - 1929

1954 - 1965

1982 - 1987

1989 - 1999

2006 - 2007

2013 - present

Note that both could lose 25% tomorrow and be where they were only two years ago.

If you know, for certain, that 2015 will be like 1929 or 2000 or 2009, then yes of course you should pull money out and invest in cash.

But if 2015 is like 1996 or 2013 or 2012 or 1992 or 1985 or any of the other many years the market was an "all-time high!" then you are going to lose.

The trick is, there is no way to know for a matter of certainty whether 2015 will be analogous to 2013 or 2009.

As others have said, cash is constantly losing purchasing power due to inflation, the goal of investing is to not lose purchasing power

Ask yourself this: if I'm not willing to invest in the market because I fear its prices, what is my alternative option? Do I think returns on the stock market will be lower than the 1.9% I get from my checking account? If not, what's keeping me from taking the dive?

You have said that you understand the flaws of market timing, and the advantages of buy and hold in low cost diversified funds, but then propose market timing?

If you hold cash for future dips in the market as part of asset allocation then that is another story. You then create a mix of stocks and bonds/savings/fixed interest. The percentage often depends on risk tolerance. If you are as risk capable as you say, then holding 95% stocks, and 5% fixed interest in a savings account/CD, then that is your asset allocation.If stocks drop 50%, then your cash will now make up 10% of your allocation, and an investment policy statement (IPS) would normally say that you need to rebalance. You would convert half your cash into stocks, thus buying at the dip. If the market continued to fall another 50%, you would again convert half your cash into stocks, and be buying at an even better dip. A well constructed personal IPS will dictate at what percentage outside your set limits you should trigger a rebalance.

This is not market timing, but it is a forced way of sticking to an asset allocation for the long term and reaping the benefits of such a plan. It is one of the reasons that bonds are usually suggested to make up at least some portion of your asset allocation. Currently bonds, and CD's may be considered equivalent, but not always. The 'dry powder' of such an approach can be powerful.

If you say you are 100% stocks, then save cash for market drops, then you are not technically 100% stocks. Some percentage is in fixed interest. If you then spend all that cash to become 100% stocks your asset allocation changes again, and is being changed at your own whims and ideas of where you think the market bottom and top occurs. A voluntarily changing asset allocation based on your own predictions of the markets is a form of market timing.

If you want the dry powder to use on a whim, then allocate some 'fun' money.If you want a buy and hold approach for the long haul that makes automatic use of market dips and rises, then create an IPS with your chosen asset allocation, and stick to it through thick and thin according to set rules that disallow market timing.

_______That came out as quite a ramble sorry.Hope it makes sense. It's probably stuff you already knew though.

In relation to the Buffet quote, being forced by your IPS to buy stocks during a massive crash because your 'safe fixed interest' allocation is more valuable is a ballsy thing to do, and is being greedy whilst most are fearful. It's one thing to say you will do it, but perhaps another when things look as bad as they did not so long ago.An IPS encouraging you to perform such an action may just be the thing to help you make the good call.

Bogleheads forum debates this stuff constantly, along with many other things, and if you haven't checked out their forum then I'd recommend it. Fantastic discussion and debate, usually backed up by referenced research and some solid wisdom. I have not invested through a crash, as I am early in the accumulation phase, so my mettle has not been tested. Boglehead forums are full of people who planned to buy during a crash but simply could not bring themselves to do it when it actually occurred. When you have little to lose it is likely easier to go 100% anything, but when you have a large sum of hard won stache the fear of losing big money comes into play as well. Mentally I think I am more prepared as I have an IPS to refer too in such an event and will give guidance.

Well, as people mentioned above. There is nothing wrong with saving up for a market crash. But dont go screwing yourself out of all the returns in the mean time.

Although I am also a "Balls of steel" level risk taker that like the 100% stocks plan...

There is some serious wisdom in the advice saying to go 80/20. 80/20 rule applys to all kinds of things in life.For Stocks vs bonds, the actual advice is more complicated, but let us just use 80/20 here.

Say you switch from 100% stocks to 80/20 (20% bonds) because you think the crash is coming. That is not bad, that is very reasonable and follows with popular advice even.

Then since, in theory, bond prices perform opposite of stocks; when the stocks crash, your bonds should go up. So then you just sell all of your now higher priced bonds and buy low priced stocks. Going back to your 100% stock plan.

That would be my suggestion if you want to try this market timing type thing. It could also just net you a loss.

If you believe in EMT then PE ratios and CAPE ratios are useless. I figure EMT is mostly right, but there are some inefficiencies.

Every time I hear someone say this, I'm left wondering what inefficiencies they mean. Or if that's just a way of dismissing the EMT without any actual evidence by appealing to vague notions.

I have an alternative theory as to why the markets can flucutate wildly while the EMT is still true, and it has nothing to do with imperfect information sharing. I think lot of players in the market are trying to make short term momentum plays, and they're betting the current blip (in either direction) will continue long enough for them to make some quick cash, even if they think the obvious long term trend is in the opposite direction that they're currently betting.

This is the kind of behavior that would support a 40% stock market dive in a year in the most prosperous nation on Earth, or a gold bubble even as gold become industrially less useful, or orange futures to soar with the hint of a blizzard even though everyone knows the crop is cyclical. Short term trading amplifies short term randomness, without any need to challenge any part of the efficient market hypothesis.

I think lot of players in the market are trying to make short term momentum plays, and they're betting the current blip (in either direction) will continue long enough for them to make some quick cash, even if they think the obvious long term trend is in the opposite direction that they're currently betting.

Yep - the stock market as a Keynesian beauty contest: traders are not pricing shares based on what they believe the inherent value of those shares to be, but based on what they believe everyone else believes the inherent value to be, or even based on what they believe everyone else believes everyone to believe the inherent value to be, and so on (ad infinitum, if you wish). As you said, no need to resort to challenging the efficient market hypothesis.

If you believe in EMT then PE ratios and CAPE ratios are useless. I figure EMT is mostly right, but there are some inefficiencies.

Every time I hear someone say this, I'm left wondering what inefficiencies they mean. Or if that's just a way of dismissing the EMT without any actual evidence by appealing to vague notions.

I have an alternative theory as to why the markets can flucutate wildly while the EMT is still true, and it has nothing to do with imperfect information sharing. I think lot of players in the market are trying to make short term momentum plays, and they're betting the current blip (in either direction) will continue long enough for them to make some quick cash, even if they think the obvious long term trend is in the opposite direction that they're currently betting.

This is the kind of behavior that would support a 40% stock market dive in a year in the most prosperous nation on Earth, or a gold bubble even as gold become industrially less useful, or orange futures to soar with the hint of a blizzard even though everyone knows the crop is cyclical. Short term trading amplifies short term randomness, without any need to challenge any part of the efficient market hypothesis.

I think you're saying the same thing. EMT is mostly right, but sometimes the market is irrational.

I think the market behaves according to EMT in the long run, but is often irrational (and not necessarily efficient) in the short run. For example, during the .com boom, adding the ".com" to the end of a company name would cause its share price to go up. Same company, new name. No new facts of any substance. People were buying on emotion. And the markets stayed irrational for a very long time. Eventually, however, values reverted to conform to the facts.

It goes the other way, too. The current bull market was fueled by the fact that so many people were crushed by the 2000-2001 and 2008-2009 bear markets that they got out of stocks completely. This dropped the market further than made sense (over-corrected to the down side.) It's rise back to historical levels was the beginning of the bull market (and happened even while equity mutual funds still showed net redemptions as people continued to head for the exits.)

I think you're saying the same thing. EMT is mostly right, but sometimes the market is irrational.

I think there is a subtle difference between the two statements. Indexer's statement was that the market is not 100% efficient--that there are inefficiencies (i.e., information not incorporated into the market price) that can be exploited. Sol's statement (and our two follow-up posts) stated that even if zero inefficiencies exist, irrational investor behavior (or, depending on how you look at it, the rational investor behavior of trying to predict the actions of all the other possibly rational, possibly irrational market participants) can explain market gyrations without needing to resort to the argument that some level of inefficiency exists in the market.

It was Buffet so said something along the lines of “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.

But how do you determine when others are being greedy vs fearful? Right now it seems to me everyone and their cousin are predicting a crash. So is now the time to buy since it feels to me like others are being fearful? "It can only go down, there's no way it can sustain this growth," etc.

Keep putting in money, I'm sticking to my automatic monthly investments. They'll buy more shares in the event of a correction, but if I didn't believe the market will eventually be higher than it is now then I wouldn't be in the market to begin with.

First off I love the dialogue on this thread just reading everyone's comments has been very educational.

Sorry about the EMT theory, I thought it was EMT but maybe I was just quoting Bogle from his Investing: The First 50 Years.

Second, to clarify, my 100% equity position is outside of a 11% state pension with full match. Thats the only reason my "balls are so brazen" so to speak, but given my young age the equity position would be high nonetheless.

Maybe I can provide some further clarification to show the position I was arguing for in "timing the market is a bad thing but I think I should try it".

I was not advocating selling off equities to increase cash to buy more equities. My account does not have automatic Tax Loss Harvesting like Betterment, so this is something I may look to implement on my own. I do have automatic Dollar Cost Averaging biweekly deposits (pre-tax due to the nature of the 457) which mirror my allocation above. I'm not stopping this by any means.

In the end, I upped my fixed interest section to 7%, up 2, to see if there will be some stock market for sale action in the future. How long I will hold the 2% inflated cash position, that I'm not sure. But since I increased my 401K allocation from 4-15% in 2008, (my first real job), I am hoping to have the testicular fortitude to dump more money in if we do have a serious downturn.

To conclude, in trying to time the market, I accept it is futile. The S&P 500 popped right back up after Monday, making me look like a fool in less than 48 hours. That being said, unless Tsapiris gets some good will and Grexit somehow does not occur, I will be looking for some discounted VEURX or similar funds within the next couple months. I like the "fun money" concept.

I've just been passively watching the markets recently. They hit their high around March 1st and have yet to go higher. If, by the end of this month, the stock price is lower than it was on April 1st (i.e. 2 down months in a row with no new high), then we're very likely in for something (correction or crash). It's not assured (because nothing is), it's just greater possibility than normal.

What I would probably do if the market crashed in the next month or so is reduce the size of my emergency fund. If I normally kept 6 months of living expenses in savings, I might reduce it to 4 (and put the other 2 months worth into VTSAX or a similar index fund). I think it makes sense to keep as much money as you're comfortable with (i.e. everything but your emergency fund) in the market at all times.

If you believe in EMT then PE ratios and CAPE ratios are useless. I figure EMT is mostly right, but there are some inefficiencies.

Every time I hear someone say this, I'm left wondering what inefficiencies they mean. Or if that's just a way of dismissing the EMT without any actual evidence by appealing to vague notions.

I have an alternative theory as to why the markets can flucutate wildly while the EMT is still true, and it has nothing to do with imperfect information sharing. I think lot of players in the market are trying to make short term momentum plays, and they're betting the current blip (in either direction) will continue long enough for them to make some quick cash, even if they think the obvious long term trend is in the opposite direction that they're currently betting.

This is the kind of behavior that would support a 40% stock market dive in a year in the most prosperous nation on Earth, or a gold bubble even as gold become industrially less useful, or orange futures to soar with the hint of a blizzard even though everyone knows the crop is cyclical. Short term trading amplifies short term randomness, without any need to challenge any part of the efficient market hypothesis.

Well my username is Indexer, and if you believe in EMT indexing is the way to go..... so its a pretty safe assumption I'm not 'dismissing' EMT. What I believe is very much in line with what you just stated. If you are comparing any two similar securities EMT normally holds true between any two securities, but the market or any given class of assets can as a group get priced too high. This is especially true when markets get irrational about valuations like tech stocks in the late 90s. So Apple, Google, and Microsoft will always be priced compared to each other based on all available information, but if tech stocks as a group go crazy all of them might be priced to high compared to where they realistically should be.

Now in case it comes up again there is probably something you should know about EMT... at least the 'Strong' form efficient market theory. If you believe the strongest form of EMT then the markets are perfectly efficient, and even insiders who have access to company earnings before they are released.... are behind the times. According to the strongest form of EMT we don't need insider trading laws because even insiders can't time the market because even their inside information(which hasn't been released yet) is already figured into the price. Theories can go to far.... at least in my opinion. So no I don't believe markets are "perfectly" efficient... that is on the same level as faith in religious dogma.

The semi-strong form of EMT just states that all publicly available information has been priced into the markets. I tend to lean towards this level, but you can have asset bubbles where all the stocks go up together without a real 'reason' to support it. These events have shown to be tied closer to emotions and greed rather than data and logic.

you can have asset bubbles where all the stocks go up together without a real 'reason' to support it. These events have shown to be tied closer to emotions and greed rather than data and logic.

I think emotions and greed are perfectly good reasons to explain asset bubbles, rather than saying "there is no reason, it's just emotions and greed".

The example you cited, of the late 90s tech bubble, is a fine place to start. Tech stocks as a whole got wildly expensive because people genuinely thought that the internet was going to change the face of human society. It wasn't that people were driving up prices because they were irrationally emotional about the asset class, it's that rational people honestly believed that brick and mortar capitalism was at a tipping point where widespread information availability would revolutionize the notion of free markets. They drove up tech prices to what they all agreed were reasonable valuations in light of a radically upsetting technology, like the invention of electricity or the automobile.

I'm not sure how this is ANY different from people who currently defend Apple's sky-high valuation as totally reasonable, given their string of successful product launches, large cash reserves, and sticky fan base. Sure, in retrospect the late 90s look ridiculous but I think it's very possible that in 20 years the notion that Apple should be worth more than GE, Walmart, McDonalds, and GM combined might be equally as embarassing. In what possible world does it make sense for a personal electronic device manufacturer with second rate market share to be worth more than the total combined values of the world's largest single retailer, the world's largest food seller and the world's largest integrated conglomerate combined, with enough left over to pay cash for the largest US auto maker? None, that's what. There are no worlds in which that objectively makes sense.

But the market isn't logical, it's a popularity contest and right now Apple is popular. All kinds of very smart people will give you very good reasons why it makes sense, and everyone believes it, and that makes it true. The 90s tech bubble was the exact same thing; everyone honestly believed it, and that made it true, and so the Efficient Market Hypothesis stands proud yet again. Everyone prices their expectations into the market, efficiently, whether they are "correct" or not.

The EMH doesn't say the market is always contemporarily priced perfectly in line with all future opinions of what the market should have been worth at all moments in the past, it says it's always priced perfectly in that moment for that moment, which is kind of tautologically obvious if you think about. I find it hard to assail the notion that a price is somehow "wrong" if there is both a buyer and a seller ready to meet it right now, and I think that what people 20 years from now think about today's trade isn't really relevant.

Which is all just my way of saying that we shouldn't all be so confident we can avoid bubbles by claiming we can see through the cracks in the EMH. You probably don't know what asset class is currently in a bubble until after the fact.

you can have asset bubbles where all the stocks go up together without a real 'reason' to support it. These events have shown to be tied closer to emotions and greed rather than data and logic.

I think it's very possible that in 20 years the notion that Apple should be worth more than GE, Walmart, McDonalds, and GM combined might be equally as embarassing. In what possible world does it make sense for a personal electronic device manufacturer with second rate market share to be worth more than the total combined values of the world's largest single retailer, the world's largest food seller and the world's largest integrated conglomerate combined, with enough left over to pay cash for the largest US auto maker? None, that's what. There are no worlds in which that objectively makes sense.

Best argument yet. I think a lot of this comes from ETF imbalances. The opening bell on CNBC was sponsored by "Powershares QQQ". ETF's are largely a widespread cancer that spreads imbalances by creating a mixed asset class with 15% in one company. Sure that won't drive up a price, but how about the 90% of others that have 3-5%? People think they are buying diversity and they are not. There is probably some backroom evil going on like this:(players are fiction)I got an Idea Bob of other financial company.What is it Bill of other financial company?Lets make a bunch of unbalanced ETF's.For what?Hold on hear me out. We will sell diversity but make them unbalanced.What for?To artificially drive up the price of various companies.And buy those companies actual stock instead?Yes.And when we have built them to astronomical proportions..We short them all the way down?Yep.We have to be in on this together though.. you can't fuck me okay.Okay, I won't fuck you but we will fuck the 99.Exactly. Fuck them. My job is worth 10,000 of their annual incomes. Im important you know.I know. Let's fuck em.First we have to convince the government to allow leveraged ETF's for both BULL and more importantly BEAR markets.Okay.Then we can really fuck them. Convince them we need a free market.Okay. I got ten senators in my pocket. I give them Colorado weed, a bunch of high end escorts, and an occasional boat or two.. I can do that.But we have to convince them it was the government.Yeah.Fucking Obama again. Fuck him and his Capital Gains tax. The government might actually survive this one.Yeah too bad.Yeah. Fuck the 99.

You don't think the price of stock reflect stock picking do you? It is ETF's and Leveraged ETF's. I think we are safe for now but expect panic if interest rates rise fast because no one will want to be part of this shit.

I thought I better add a couple of things. Never present a problem without a solution right.I think your argument is still wrong.1. Apple has bigger profit margins because it has less competition. Thats right. Everyone sells food but not everyone builds iPhone or innovates like Apple does.2. Apple has a large loyal customer base. We don't coupon shop at other companies, we pay full price. And while other retailers cut profit margins to save their ass (Best Buy) they can't even carry Apple without Apple having its own section. A model other companies are now replicating but Apple did it first.3. Apple doesn't show all its cards. They do have more in store right now.4. Apple isn't at the mercy of another company-Google- if Google decides to squeeze other companies will squirm as Apple laughs.5. Apple isn't at the mercy of another companies bad product. You can't buy a shitty micro card and blame Apple for losing all the info you didn't back up.6. Apple doesn't have the competition. When people talk about Samsung they are really talking about Google (android). Who's software is also in LG, and a buttload of other companies. 7. Abstract technical specs don't mean much. Apple is sexy. If another computer has a faster chip who cares? Apple picked all the parts to ensure Quality (something) 90% of the PC and Android market lacks. They are cheaper because they cut their bottom line. A late 9o's Ford Mustang GT sold more than Z28's did even though Z28's had way more power-- why? Because a convertible Mustang is fucking sexy that's why.8. Once a customer gets used to magnetic power cords, slot driven disc players, aluminum bodies, retna displays, a product that works, with no bloatware, with no virus, thats very reliable, with a shitload of software for all your office needs, to edit movies, pictures, and music right out of the box... uh why the fuck would I ever. I mean I ever go back to PC. PC that you have to relearn every 5 years. PC that everyone else puts their shitty products into. PC that tries on every turn to rake you for money. Sure they tell you Apple is expensive until you factor in virus protection, Office Professional, Video Editing Software, and what you pay to retrieve to pictures when you get a nasty virus on your PC ($300 x2 from personal experience). That is why I say screw PC and Andriod. Screw them right in the face. Im sticking with Apple and always will.

and one more thing..9. Im buying a iPhone6 64 Gig is approximately 7 hours. I work nights and its my weekend. I wish it was open now, but Im going to stay up and go get it. I've been waiting for about a year for my contract to end. What are those full price? $800? Im going to get an even more expensive one in 2 years. If you own Apple stock that you bought on a app that no non-Apple company has yet for zero commission, and then go buy and iPhone, is that like paying yourself.. I think it is

I thought I better add a couple of things. Never present a problem without a solution right.I think your argument is still wrong.1. Apple has bigger profit margins because it has less competition. Thats right. Everyone sells food but not everyone builds iPhone or innovates like Apple does.2. Apple has a large loyal customer base. We don't coupon shop at other companies, we pay full price. And while other retailers cut profit margins to save their ass (Best Buy) they can't even carry Apple without Apple having its own section. A model other companies are now replicating but Apple did it first.3. Apple doesn't show all its cards. They do have more in store right now.4. Apple isn't at the mercy of another company-Google- if Google decides to squeeze other companies will squirm as Apple laughs.5. Apple isn't at the mercy of another companies bad product. You can't buy a shitty micro card and blame Apple for losing all the info you didn't back up.6. Apple doesn't have the competition. When people talk about Samsung they are really talking about Google (android). Who's software is also in LG, and a buttload of other companies. 7. Abstract technical specs don't mean much. Apple is sexy. If another computer has a faster chip who cares? Apple picked all the parts to ensure Quality (something) 90% of the PC and Android market lacks. They are cheaper because they cut their bottom line. A late 9o's Ford Mustang GT sold more than Z28's did even though Z28's had way more power-- why? Because a convertible Mustang is fucking sexy that's why.8. Once a customer gets used to magnetic power cords, slot driven disc players, aluminum bodies, retna displays, a product that works, with no bloatware, with no virus, thats very reliable, with a shitload of software for all your office needs, to edit movies, pictures, and music right out of the box... uh why the fuck would I ever. I mean I ever go back to PC. PC that you have to relearn every 5 years. PC that everyone else puts their shitty products into. PC that tries on every turn to rake you for money. Sure they tell you Apple is expensive until you factor in virus protection, Office Professional, Video Editing Software, and what you pay to retrieve to pictures when you get a nasty virus on your PC ($300 x2 from personal experience). That is why I say screw PC and Andriod. Screw them right in the face. Im sticking with Apple and always will.

and one more thing..9. Im buying a iPhone6 64 Gig is approximately 7 hours. I work nights and its my weekend. I wish it was open now, but Im going to stay up and go get it. I've been waiting for about a year for my contract to end. What are those full price? $800? Im going to get an even more expensive one in 2 years. If you own Apple stock that you bought on a app that no non-Apple company has yet for zero commission, and then go buy and iPhone, is that like paying yourself.. I think it is

The EMH doesn't say the market is always contemporarily priced perfectly in line with all future opinions of what the market should have been worth at all moments in the past, it says it's always priced perfectly in that moment for that moment, which is kind of tautologically obvious if you think about. I find it hard to assail the notion that a price is somehow "wrong" if there is both a buyer and a seller ready to meet it right now, and I think that what people 20 years from now think about today's trade isn't really relevant.

Sol, to be fair, all you (and I, in my Keynesian beauty contest post above) have done is shift the definition of "value" from an intrinsic measure to an extrinsic measure. When determining the value of an asset, of course it's tautological that the market value equals the market value. In Buffet's parable of the mouthy neighbor who every day shouts a new price over the fence at which he is willing to buy your farm, the value of your farm (using a market value definition) does indeed fluctuate with his erratic behavior (if he's willing to buy the farm for a certain price, by definition the farm is worth that price). But has the intrinsic value of the farm changed?

Take the more extreme example of BrooklynGuy Corp. ("BGC"), which I formed last week and to which I transferred over ownership of a bank account with $1 million on deposit. BGC is a shell corporation with no assets or liabilities other than this bank account. Yesterday, I took BGC public, and, lo and behold, investors bid up its shares to a total market capitalization of $10 million! BGC unequivocally has a market value $10M, because that's the price at which the market has valued it. But in this example, because there is a clear objective measure of the company's intrinsic value, it is easy to see that the intrinsic value of the company is not $10M, but $1M. So how can the market value differ (so wildly, no less) from the intrinsic value? There are at least two equally plausible (but mutually exclusive) possible explanations: (1) the market was inefficient in transmitting information about the company to buyers (e.g., the buyers believed BGC to own a $10M bank account, and that's why they were willing to pay $10M for it) and (2) the buyers were irrational (e.g., they were simply bat-shit crazy, and that's why they were wiling to knowingly fork over $10M in exchange for $1M wrapped in a corporate clam-pack).

Take the more extreme example of BrooklynGuy Corp. ("BGC"), which I formed last week and to which I transferred over ownership of a bank account with $1 million on deposit. BGC is a shell corporation with no assets or liabilities other than this bank account. Yesterday, I took BGC public, and, lo and behold, investors bid up its shares to a total market capitalization of $10 million! BGC unequivocally has a market value $10M, because that's the price at which the market has valued it. But in this example, because there is a clear objective measure of the company's intrinsic value, it is easy to see that the intrinsic value of the company is not $10M, but $1M. So how can the market value differ (so wildly, no less) from the intrinsic value? There are at least two equally plausible (but mutually exclusive) possible explanations: (1) the market was inefficient in transmitting information about the company to buyers (e.g., the buyers believed BGC to own a $10M bank account, and that's why they were willing to pay $10M for it) and (2) the buyers were irrational (e.g., they were simply bat-shit crazy, and that's why they were wiling to knowingly fork over $10M in exchange for $1M wrapped in a corporate clam-pack).

I think some people on that momentum thread want to get a piece of BGC. It's going through the roof!

Take the more extreme example of BrooklynGuy Corp. ("BGC"), which I formed last week and to which I transferred over ownership of a bank account with $1 million on deposit. BGC is a shell corporation with no assets or liabilities other than this bank account. Yesterday, I took BGC public, and, lo and behold, investors bid up its shares to a total market capitalization of $10 million! BGC unequivocally has a market value $10M,

In this hypothetical example, like in many real world examples, the company has been valued by investors at a higher dollar figure than the value of its assets for one very simple reason: the expectation of future profitability.

Maybe BG is a recognized genius and they think he will do great things for the company. Maybe they were first to market with a hot new product, or are creating a new market that is expected to soar, or they hold intellectual or copy rights that give them a leg up on the competition, or anything else that gives them an edge but doesn't show up on the books as an asset. It doesn't really matter why, if investors think the company is worth more then it IS worth more, by virtue of their willingness to pay that price.

I'm not sure "intrinsic value" has any meaning in this environment. As I stated above, those investors don't have to be ill-informed or irrational to bid up the market cap above the saleable value of assets. They're pricing in their expectations.

Maybe they were first to market with a hot new product, or are creating a new market that is expected to soar, or they hold intellectual or copy rights that give them a leg up on the competition, or anything else that gives them an edge but doesn't show up on the books as an asset.

Nope - by design, I set up the hypothetical to avoid these types of factors. When I said BGC had "no assets," I really meant it: it has no intellectual property or other intangible assets, whether they show up on its books or not. BGC is a corporate entity (another words, a legal fiction) that owns a bank account: nothing more, nothing less.

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Maybe BG is a recognized genius and they think he will do great things for the company

Ok, now I see why you were confused. While this is clearly true IRL, I forgot to mention that in my hypothetical, BG has no control or influence over the management of the company -- in fact, the irrevocable terms of BGC's charter provide that it is a single-purpose entity and under no circumstances can BGC ever engage in any activity whatsoever other than ownership of a single bank account.

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It doesn't really matter why, if investors think the company is worth more then it IS worth more, by virtue of their willingness to pay that price.

If you mean it doesn't really matter for purposes of what BGC's market value is, then you are correct. But this hypothetical was designed to illustrate why it does matter for purposes of what BGC's "value" is using valuation measures that attempt to identify its intrinsic value.

If BGC existed in the real world, it would be a safe bet that, eventually, the market value would drop to align with the intrinsic value. But the major wrinkle is figuring out the intrinsic value of real companies, which, as you say, have all kinds of factors that can make their intrinsic value difficult or impossible to determine. And for all intents and purposes, the index investor's response is to throw up her hands and say the same thing you are saying: "intrinsic value is dead; market value is king; long live market value."

I have Robinhood loaded up now with cash posed to strike mid Mayish. Im a fool though. Im learning everyday. I hope God still loves a fool.

If you are not sure what to do, sometimes, nothing is the right thing. Your cash will not disappear over night. Think about it, sleep on it, the market will be there tomorrow.

One of the books I'm reading suggested that if you're doing dollar cost averaging, to do it quarterly. It doesn't make that much of a difference in terms of time in the market, over the long term, but it provides a number of advantages:- It gives you a bigger tax lot for tax lot harvesting.- It gives you a bigger chunk of cash if the market crashes (let's you rebalance into the asset that crashed.)- It lets you rebalance quarterly in a taxable account without selling anything.

you can have asset bubbles where all the stocks go up together without a real 'reason' to support it. These events have shown to be tied closer to emotions and greed rather than data and logic.

I think emotions and greed are perfectly good reasons to explain asset bubbles, rather than saying "there is no reason, it's just emotions and greed".

The example you cited, of the late 90s tech bubble, is a fine place to start. Tech stocks as a whole got wildly expensive because people genuinely thought that the internet was going to change the face of human society. It wasn't that people were driving up prices because they were irrationally emotional about the asset class, it's that rational people honestly believed that brick and mortar capitalism was at a tipping point where widespread information availability would revolutionize the notion of free markets. They drove up tech prices to what they all agreed were reasonable valuations in light of a radically upsetting technology, like the invention of electricity or the automobile.

Where is that Hall-of-Fame post-repository again? Finally a post I can link back to every time someone here says "LOL, market irrationality is easily exploitable, just look at pets.com in 1999!" Unless you were actually there in 1999 and LOLing at pets.com, STFU.

Take the more extreme example of BrooklynGuy Corp. ("BGC"), which I formed last week and to which I transferred over ownership of a bank account with $1 million on deposit. BGC is a shell corporation with no assets or liabilities other than this bank account. Yesterday, I took BGC public, and, lo and behold, investors bid up its shares to a total market capitalization of $10 million!

I don't get it. Why did investors bid up the market value to $10M? pets.com was bid up because investors thought that it would generate sufficient profits in the future to support its valuation. Investors have no reason to believe BGC will generate any profits in the future beyond what $1M in cash can generate. So I say that your assumption of a $10M market value is simply an invalid assumption; it would take zero time for the "market value" to align with the "intrinsic value", because even in the most "irrational" market, the market would never value it at more than $1M.

It's important to remember that, at least by Buffett's definition, guesses about the future are a critical component of "intrinsic value":

The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover – and this would apply even to Charlie and me – will almost inevitably come up with at least slightly different intrinsic value figures.

The guy hollering over the fence isn't changing his price just because he's insane. He's changing his price (at least in part) because his estimates of the future are changing.

If BGC has an initial public offering, wouldn't BGC then get the proceeds of that IPO? In other words, if the IPO sets the value at $10M, wouldn't the BGC bank account now have $11M?

At the very least, if the IPO value was set to $1M, and the investors bid it up to $10M, the BrooklynGuyCorp would now have $2M (original balance + IPO proceeds).

If the company itself issued new shares to the public (which is what normally happens in an IPO), then yes, the company receives the proceeds.

In my mind, my example was a registered public sale of my shareholdings in the company, in which case the proceeds would all go to me (not BGC). But either way, the point remains the same -- if BGC raised $1M in the initial offering and thereafter had $2M in its bank account, and investors in the secondary market subsequently bid up the market capitalization to $10M, there is still an $8M differential between market value and intrinsic value (as measured by the number of dollars in BGC's bank account, which in this hypothetical case I would say is beyond question the best way to determine intrinsic value) that needs explaining.

I don't get it. Why did investors bid up the market value to $10M? pets.com was bid up because investors thought that it would generate sufficient profits in the future to support its valuation. Investors have no reason to believe BGC will generate any profits in the future beyond what $1M in cash can generate. So I say that your assumption of a $10M market value is simply an invalid assumption; it would take zero time for the "market value" to align with the "intrinsic value", because even in the most "irrational" market, the market would never value it at more than $1M.

The hypothetical was intentionally extreme, and I agree it would not happen in the real world--but that's not to say it could not happen in the real world (so its not an "invalid assumption," in the logical sense). Answering the question of "why did investors bid up the market value to $10M?" was the entire point--as I described, I see two plausible explanations (which might be the only two): (1) the buyers did not have enough information about the company (i.e., the market was inefficient) or (2) the buyers were insane (they knowingly paid $10M for $1M).

Of course, in the real world, this would never happen, because (i) the public stock markets are very efficient (i.e., good at transmitting material information about companies to market participants), and certainly not so grossly inefficient as to lead investors to believe that a single-purpose deposit-account-holding company with $1M in the bank actually has $10M in the bank and (ii) the investing public is not insane, and certainly not so bat-shit crazy as to knowingly pay $10M for $1M.

But this thought experiment starts to have application in the real world if you dial down its extremity. What if the company weren't a shell owning nothing more than a bank account, but a shell that owns nothing more than a website platform for the sale of pet-related products? Was the promise of future profit potential (in light of then-current expectations about the internet's potential to dislocate the retail industry) enough to support the market valuation investors gave to pets.com? Or were investors being irrationally exuberant? Who knows? I agree with you and sol that the market value is the market value is the market value, and, as an index investor, I throw up my hands and say "I don't care whether or not other market participants are being irrational, I'm buying the entire market at its current market price." But, as my hypothetical (which, I think we can agree, is theoretically possible, if not possible in practice) illustrates, you can't use the fact that "the market price is what it is" to disprove the possibility that investors may very well be acting irrationally.

The idea that people generally are rational actors is itself an assumption you and sol are making, not the conclusion. And I agree with you (which is why I agree that my extreme hypothetical would never exist in reality), but not to the same extent that the discipline of economics used to do before the advent of behavioral economics--people are indeed capable of acting irrationally.

People are definitely capable of acting irrationally. We're kind of known for that.

In terms of stock prices, I think the bigger the bubble gets, the more the people who don't know any better are brought into the market, thereby increasing irrational action. Maybe the sophisticated investors are the ones selling their pets.com stock to the speculators who had never bought a stock before in their lives and heard that the market was the way to 'get rich quick'. But a lot of "sophisticated" investors also may know that the suckers are going to be bidding up the prices and so they stay in the market at irrational values to keep making a buck. It's both a somewhat efficient market and a den of irrationality. That's why I say buy the market and hold forever.

Brooklyn, I'm straining to find credibility in your hypothetical example, basically because we seem to have different assumptions about how the market works.

I think I understand the artificial constraints you've imposed on the story, but I see an alternative explanation for the valuation that you think is due to insanity. The investors expect future profit. They are paying more because they believe in the company. Maybe your construct makes that belief misplaced and thus the problem is inefficient information sharing, but in the real world crazy high valuations are always due to rational investor expectations. It's sort of axiomatic to the theory of markets that people don't deliberate overpay for something without a reason, however flimsy it may be, so your hypothetical example feels like you're saying "what if markets didn't function..."

I can get behind the idea of labeling those flimsy reasons for bidding up the price as insanity, but that doesn't make the investors irrational, just inefficient. Though it feels somewhat euphemistic to call stupid people making bad investment decisions just under informed investors, the distinction preserves their status as rational actors.

And as the raging thread about dual momentum investing has demonstrated, lots of rational people can make seemingly irrational decisions. Those folks are selling low and buying high, purposely amplifying random market movements and contributing to crashes and bubbles, but they're not irrational or under informed.

Brooklyn, I'm straining to find credibility in your hypothetical example, basically because we seem to have different assumptions about how the market works.

I think I understand the artificial constraints you've imposed on the story, but I see an alternative explanation for the valuation that you think is due to insanity. The investors expect future profit. They are paying more because they believe in the company. Maybe your construct makes that belief misplaced and thus the problem is inefficient information sharing, but in the real world crazy high valuations are always due to rational investor expectations. It's sort of axiomatic to the theory of markets that people don't deliberate overpay for something without a reason, however flimsy it may be, so your hypothetical example feels like you're saying "what if markets didn't function..."

I can get behind the idea of labeling those flimsy reasons for bidding up the price as insanity, but that doesn't make the investors irrational, just inefficient. Though it feels somewhat euphemistic to call stupid people making bad investment decisions just under informed investors, the distinction preserves their status as rational actors.

And as the raging thread about dual momentum investing has demonstrated, lots of rational people can make seemingly irrational decisions. Those folks are selling low and buying high, purposely amplifying random market movements and contributing to crashes and bubbles, but they're not irrational or under informed.

I'm not convinced brooklynguy's story is so irrational. Just have a read about Lithium Exploration Group (LEXG), a penny-stock corporation with no assets, no revenue, and a market cap of (briefly) over $200 million in 2011. And it was promoted by a firm called Gekko Industries(!) You really think everyone that grabbed a handful of that steaming turd of stock expected a return based on future profits, or do you think they just expected to be able to sell it a few hours later to a greater fool?

Just wanted to know what mustachians think, all I hear about in market news is how the Bull is tired and the Bear is coming soon.

"What I think?" I think I'd very much like to borrow your crystal ball. ...So I can find the numbers for this week's lottery. NOT so I can watch Charlize Theron taking a bath. ...I promise I won't do that.

The point about BGC was that there can be a disconnect between intrinsic value ($1 million) and extrinsic value ($10 million) due to a variety of factors, including tons of heard mentality type stuff (irrationality). Most humans don't do what's in their best interest because of ultra short-term thinking.

Yes, that's because there is no real-world credibility to the hypothetical, because the factual predicates required for the hypothetical to occur do not exist in the real world. BGC, if it existed, would clearly be worth $1M. In the real world, the public stock markets are efficient enough to communicate to the marketplace the relevant facts that would lead any rational person to conclude that BGC is worth $1M, and the market is made up of actors not irrational enough to pay more than that. So BGC's market cap would never rise above $1M.

But the point of the hypothetical was to illustrate that we can't necessarily use market value as a proxy for intrinsic value (even though, as you pointed out, market value is always equal to itself, as a tautological truth). Or, said differently, it is possible for the market to be overvalued (or undervalued). Earlier, you said "I find it hard to assail the notion that a price is somehow 'wrong' if there is both a buyer and a seller ready to meet it right now." My hypothetical was intended to assail that notion -- if a buyer and a seller stood ready to sell $1M for $10M, would you still find it hard to believe that that price is somehow "wrong"? Your answer, I think, is "no, but in the real world no one would pay $10M for $1M," but that's only because of the intentional extremity of the hypothetical. It clearly demonstrates that it is theoretically possible for market value and intrinsic value to diverge. And it does happen in reality as well, in less extreme ways (though sometimes not even that much less extreme) -- Buffett has described how he used to regularly pick up a "discarded cigar butt" of company, which was trading for less than the saleable value of its assets. Cases like that similarly assail your notion that a market price can't be "wrong."

Now, the more efficient the market, and the more rational its participants, the lower the chances that such mismatches will exist between market value and intrinsic value. Your original point, I think, was that today's stock market is efficient enough and the investing public rational enough to enable us to conclude that market value essentially is intrinsic value (or at least necessarily (in the logical sense) equals intrinsic value). The distinction may be subtle, but I disagree with this -- instead, I think today's stock market is efficient enough and the investing public rational enough to cause market value to align with intrinsic value so closely that they are effectively always equal in practice, but they are different things capable of deviating from one another. Moreover, while I believe that is true with respect to the stock market as a whole, I also believe there are individual components of the market (like individual companies) where market value and intrinsic value do deviate (in practice, not just in theory), and investors like Warren Buffett are able to exploit that.

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And as the raging thread about dual momentum investing has demonstrated, lots of rational people can make seemingly irrational decisions. Those folks are selling low and buying high, purposely amplifying random market movements and contributing to crashes and bubbles, but they're not irrational or under informed.

I agree, and maybe we're both being too imprecise in our use of terms like "rational." In your original post that started us down this path, you said the following:

In what possible world does it make sense for a personal electronic device manufacturer with second rate market share to be worth more than the total combined values of the world's largest single retailer, the world's largest food seller and the world's largest integrated conglomerate combined, with enough left over to pay cash for the largest US auto maker? None, that's what. There are no worlds in which that objectively makes sense.

But the market isn't logical, it's a popularity contest and right now Apple is popular. All kinds of very smart people will give you very good reasons why it makes sense, and everyone believes it, and that makes it true.

The point about BGC was that there can be a disconnect between intrinsic value ($1 million) and extrinsic value ($10 million) due to a variety of factors, including tons of heard mentality type stuff (irrationality).

To hammer the semantics point, I wouldn't call dual momentum investing "irrational" even though it clearly causes people to bid up the price of assets to values far beyond their supposed intrinsic value. Those people are making rational decisions about what are potentially very short term trades, ignoring intrinsic values and instead just piling on to the current market zeitgeist. They're trying to profit from the time lags inherent in the momentum of otherwise random market gyrations, and in so doing they might create a bubble very much like the $10m valuation for a $1m bank account that brooklyn posited. But it's clear to me that they did so rationally, while trying to turn a profit.

A few posts back I said that such people might be considered ill-informed instead of irrational, but now I'm questioning even that assessment. They're choosing to ignore things like a company's assets because it's an investment strategy based solely on charted prices. They don't care what the companies make or do, or what the prognosis of their market share looks like, or their debt ratios or cash holdings or anything. They deliberately ignore all that, not because they're unaware of it but because it's not how they're choosing to make their trade decisions. So are they really ill-informed? It's a very data-driven approach, they're just using different data.

This thread has become something of an ouroboros, as I find myself repeating repeating myself again and again. Rational and self-interested and well-informed investors can make markets behave in ways that appear to contradict the EMH, just because not everyone is following the same rational strategy on the same time scale.

By this point, I think I've convinced myself that you can't use market performance to contradict the efficient market hypothesis.

Just wanted to know what mustachians think, all I hear about in market news is how the Bull is tired and the Bear is coming soon.

"What I think?" I think I'd very much like to borrow your crystal ball. ...So I can find the numbers for this week's lottery. NOT so I can watch Charlize Theron taking a bath. ...I promise I won't do that.

Was trying to follow, bit difficult to concentrate after this though....P.s. thats a special crystal ball that can see the future and through walls too :)

I've just been passively watching the markets recently. They hit their high around March 1st and have yet to go higher. If, by the end of this month, the stock price is lower than it was on April 1st (i.e. 2 down months in a row with no new high), then we're very likely in for something (correction or crash). It's not assured (because nothing is), it's just greater possibility than normal.

As new highs have been reconfirmed this past week, the likelihood of being on a downswing has diminished. That doesn't mean one couldn't start now, it just means that the peak was not March 2nd. The first 3-4 months of decline are slow and then there's a drop (the crash) at about the half-way point in the cycle since it follows a sine wave (roughly).

I have Robinhood loaded up now with cash posed to strike mid Mayish. Im a fool though. Im learning everyday. I hope God still loves a fool.

If you are not sure what to do, sometimes, nothing is the right thing. Your cash will not disappear over night. Think about it, sleep on it, the market will be there tomorrow.

One of the books I'm reading suggested that if you're doing dollar cost averaging, to do it quarterly. It doesn't make that much of a difference in terms of time in the market, over the long term, but it provides a number of advantages:- It gives you a bigger tax lot for tax lot harvesting.- It gives you a bigger chunk of cash if the market crashes (let's you rebalance into the asset that crashed.)- It lets you rebalance quarterly in a taxable account without selling anything.